Benefits and risks of investing in pharmaceutical stocks
The benefits of investing in pharmaceutical stocks include:
- Potential for long-term growth. Many pharmaceutical stocks stand to benefit from aging demographics and medical advances.
- Income generation. Most large pharmaceutical stocks pay dividends, and some boast exceptional dividend track records.
- Attractive valuations. Several pharma stocks are trading at more attractive valuations than the overall market.
However, there are also several risks associated with investing in pharmaceutical stocks, such as:
- Potential for clinical failure: Early-stage drug candidates are especially likely to fail, meaning they are proven to be unsafe or ineffective in clinical trials. Even drug candidates in phase 3 testing can ultimately fail.
- Potential failure to obtain regulatory approval: Even drug candidates that complete clinical testing may still fail to obtain regulatory approval.
- Non-reimbursement risks: To achieve commercial success for approved drugs, pharma companies must convince institutional payers, such as public and private health insurers, to reimburse patients for the costs of their drugs. Pharmaceutical companies must also contend with pressure from these payers to lower drug prices below their targets.
- Product liability and litigation potential: The medical risks associated with pharmaceutical drugs expose drugmakers to liability issues. Companies can be forced to recall drugs from the market due to safety concerns, and lawsuits against pharma companies are common.
Methodology: How these stocks were chosen
The primary criterion for selecting these stocks was that they all generate significant revenue in the pharmaceutical industry. Johnson & Johnson is the only member of the group that also has a major focus on another area -- medical technology. However, it's still one of the world's largest drugmakers.
Risk-reward profiles were also important in the selection process. While each of the chosen stocks faces some risks, they all have solid long-term growth prospects that should more than offset them.
Should you invest in pharmaceutical stocks?
Pharmaceutical stocks aren't the best fit for every investor. Many large pharma stocks won't deliver the growth some investors prefer.
However, pharmaceutical stocks could appeal to other investors. Many pharmaceutical companies pay attractive dividends, so their stocks are well-suited for income-focused investors. Pharmaceutical stocks can also be safe havens during periods of market volatility.
